S&P Global Ratings downgraded Toledo, Ohio-based ProMedica Health System's long-term rating several notches to "BBB" from "A+."
The bonds have been removed from CreditWatch with negative implications, where they were initially placed April 26.
The downgrade is reflective of ProMedica's recent acquisition of HCR ManorCare, the second-largest provider of post-acute and long-term care in the nation. The $4.4 billion acquisition, finalized July 26, was through a joint venture with Welltower, a real estate investment firm. Under the deal, Welltower owns 80 percent of the HCR ManorCare real estate, and ProMedica owns the other 20 percent as well as HCR ManorCare's operating company. ProMedica also entered into sizable long-term lease agreements as part of the deal.
"The multi-notch downgrade reflects the significant debt issuance of $1.15 billion and cash usage of $524 million to fund ProMedica's full acquisition of HCR ManorCare's operations but not most of the hard assets, as well as the 20 percent investment in the real estate joint venture with Welltower," said S&P credit analyst Anne Cosgrove.
The transaction drives adjusted minimum annual debt service coverage to levels more consistent with the lower rating. In addition, the new debt, cash payments and lease agreements pressure pro forma projected debt and cash-related metrics.
S&P said the downgrade also reflects the volatility in the post-acute sector, which has seen reimbursement changes and declining volume trends, among other operating pressures.
The credit rating agency favorably viewed ProMedica's leading business position in the Michigan market, and the diversification of services brought by the HCR ManorCare acquisition.
The outlook is stable, reflecting S&P's expectation that ProMedica will effectively integrate HCR ManorCare to maintain healthy cash flow and adequate debt coverage.